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Big Changes with Builders

Home builders have enjoyed a surge of demand for most of the past decade, but they must now prepare for the down side of their always cyclical market.

Over the past 10 years, home builders constructed more houses than in any other era in recent history. From 1995 to 2005, more than 13.5 million single-family homes went up, according to the National Association of Home Builders (NAHB), Washington, D.C. Electrical manufacturers, electrical distributors and independent manufacturers' reps sold a mountain of load centers, circuit breakers, wiring devices and lighting fixtures as well as many miles of building wire to electrical contractors to power these homes.

The residential market is one of the three largest markets for electrical distributors, along with the industrial market and the commercial office market. When electrical distributors were surveyed in 2003 about their business mix for Electrical Wholesaling's Market Planning Guide, new residential construction accounted for 19.1 percent of electrical distributors sales (16.3 in single-family and 2.8 percent in multi-family new construction). That percent of sales increased 5.7 percent from the previous survey done several years earlier. The increase is quite possibly due to electrical distributors shifting their market mix to cover this market because of the robust construction climate.

Builder Blues

Good times never last forever in the home-building market, and those distributors, reps, contractors and manufacturers that rely on it for a large percentage of their businesses will soon feel the pinch, if they haven't felt it already.

Experienced market analysts see the current slide in housing starts as a part of a normal business cycle in the home-building industry. Over the long haul, key market drivers such as the number of available first-time home buyers, continuing strong demand for second-home and senior housing, and buyer-friendly interest rates will continue to support a healthy housing market over the long haul.

However, speculative buying, inflated prices in some hot markets and exotic flavors of variable-interest mortgages have taken their toll on the home-building industry, as indicated by the recent barrage of poor earning reports released by some of the nation's largest home builders.

According to an Associated Press report published last month, the markets considered at greatest risk for falling home prices are the once-booming regions of California and Florida, parts of the Mountain West and the Northeast. Richard Dekaser, chief economist at National City Corp., Cleveland, did a study with Global Insight, Waltham, Mass., that identified 71 metropolitan areas — representing 39 percent of the single-family home market — as extremely overvalued. Of the top 25 cities on that list, 14 are in California and seven are in Florida.

Although the national media are preoccupied with falling home prices in high-profile markets such as Southern California, the New York metropolitan area and some trendy Sunbelt addresses where speculation ran wild, many other markets are not yet seeing any decline in business. For instance, in Houston, Mark Jenson, president, Key Electrical Supply, says it's still a hot market. “We have enjoyed the upswing,” he says. “We don't see it cooling off to the degree the press is portraying it out there. If interest rates stay where they are, I think we will be OK. By 2016, Houston's population is supposed to be 9 million folks, and right now it's 5 million. They are going to have to house them somewhere.”

Savvy builders know how to endure these business cycles. But when the home-building industry comes through this downturn, it may have a distinctly different look to builders as well as the distributors, manufacturers, reps and contractors that rely on their business. Two trends are slowly but surely reshaping this business: the growing reach of the national builders and the national purchasing initiatives they develop to prop up profits and streamline their businesses in search of supply-chain efficiencies.

Biggest of the Builders

Consolidation is shaking the home-building market to its very foundation. Independent electrical distributors have lived for years with four national electrical-wholesale companies accounting for up to 20 percent of total industry sales, but they haven't seen consolidation on the same scale as the home-building market. The 10 largest home builders, as ranked by Builder magazine on its Builder 100 listing, now account for 36.6 percent of all homes started, and industry analysts expect them to account for more than 50 percent of sales by 2010. (See sidebar “The 10 Biggest Builders.) These statistics translate into some big numbers. The 10 largest home builders closed on more than 500,000 new homes in 2005. Think about all the electrical equipment a half-million new homes require.

Another truly mind-boggling number that quickly surfaces in any study of the home-building market is how much land the biggest builders control. For instance, Toll Brothers Inc., Horsham, Pa., isn't even one of the 10 largest builders, but it owns or has options on 82,900 lots. The company, which focuses on the luxury-home niche and will have 265 developments in the United States by year-end, puts such a premium on land acquisition that it uses Google Earth's satellite surveys to find open tracts of land at least 200 acres in size. It then finds the owners of these tracts and makes bids for them.

Lots for future development are precious. They require long-term, big-dollar investments that scare off some smaller builders because it can take five years or more for a builder to gain all necessary environmental approvals and building permits. Big builders have the capital to make these long-term investments in choice land, forcing smaller builders to find other parcels.

The influence of big builders varies with the market area. According to a recent study by the Joint Center for Housing Studies of Harvard University, big builders only account for up to 20 percent of new homes sold in Atlanta; Los Angeles; and Riverside, Calif. However, in Columbus, Ohio; Cincinnati; Austin, Texas; and Baltimore, the top five builders account for 45 percent or more of all new homes sold.

When big builders talk, the market listens. The Joint Center for Housing Studies of Harvard University recently published another study on big builders that closed 500-plus single-family homes in 2004 on the most important reasons for their growth and success. More than 50 percent of the respondents said strong housing market fundamentals were the top reason for their success, and approximately one-third of respondents said their strategies for acquiring land for future housing developments was most important.

National Purchasing Contracts

Although the Harvard University study said less than 10 percent of respondents mentioned savings from product purchases as the biggest factor in their company's growth and success, it's a strategy that attracts plenty of attention.

It's difficult to get manufacturers, distributors and builders to talk about specific purchasing contracts, and during the research for this article, many companies politely declined to comment on their use of contracts. Some sources didn't want to alienate the distributors or electrical contractors they had worked with for decades in the housing market by talking publicly about these contracts. However, there's no doubt there's a lot of conversation right now about striking up new alliances.

One reason builders haven't inked more national contracts with electrical manufacturers is probably that electrical products account for a relatively small percentage of a builder's total purchases for a home when compared with big-ticket items such as framing lumber, cabinetry and plumbing. According to Big Builder magazine, in a 2,500-square-foot house, electric wiring and lighting account for 3.4 percent and 0.9 percent, respectively of a builder's purchases. In contrast, framing and trusses account for 21.3 percent and countertops and cabinetry account for 6.6 percent. (See sidebar “The Products that Count” on page 30.)

However, it's probably only a matter of time before more electrical manufacturers move to national contracts. According to an article in the March 2006 issue of Big Builder magazine, Beazer Homes USA, Atlanta, the sixth largest builder on the Builder 100 listing, said its national contracts for lighting products, appliances and plumbing fixtures had helped it save more than $1,000 per home. The article also said Miami-based Lennar Corp., ranked as the third largest builder, has 40 national contracts today for products including concrete, roof products, faucets, appliances and paint.

With $14.7 billion in sales and 37,022 homes closed in 2005, Centex Corp., Dallas, is the fourth largest builder in the United States. The company is clearly positioning itself to buy direct from manufacturers, according to a presentation it did at its 2005 Annual Investor Conference. Centex wants to buy direct to leverage its scale, drive down costs and boot execution efficiency. The company says it can achieve 30 percent to 50 percent in savings on key building materials by sourcing some products from China and leveraging its CTX Builder Supply division, a distribution arm of the company. Centex plans to have CTX Building Supply buy products directly from manufacturers, bring them into distribution centers and repackage them into kits to be shipped directly to job sites. Once this strategy works for several of the largest product categories, Centex plans to employ it with purchases of lighting fixtures, flooring, nails, countertops, locks, faucets and other building products.

Smaller home builders also realize the advantages of buying in bulk and pool their collective purchasing power through Custom Builders USA (CBUSA), Washington, D.C., a buying group similar in concept to the electrical industry's buying/marketing groups. The company has more than 200 members who bought $1.1 million in building products in 2005, according to Custom Home magazine.

Electrical Interest

One electrical manufacturer's salesperson based in San Diego, one of the hottest housing markets in the United States over the past decade, has been selling residential electrical products to and through electrical distributors and contractors for 20 years. He said in the past five years his company has made a big push with builders, and that all of its salespeople must now call on builders.

“We are trying to protect our relationships with our electrical distributors,” he said anonymously. “But builders are coming to us and asking us if they can buy direct, and we tell them they cannot. The majority of the business is written through the electrical distributor to the electrical contractor and through the builder. That's because the electrical distributor doesn't want to jeopardize its relationship with the electrical contractor.

“Electrical contractors don't want to get into production homes and do anything different. They want to put the same thing in every house. That's how they bid the job. If the distributor went to the builder direct and his contractor found out, he would be livid.”

At least one electrical wholesaler was hesitant to speak publicly about his company's plans to work directly with builders. “We have figured out that needs to happen,” he says. “It's a nasty, competitive business. That's the downside. The big national builders come in and squeeze everyone who is in line to get squeezed.”

Although this distributor didn't want to talk publicly about his relationship with builders, some electrical distributors are quite proud of how they help home builders. Rexel USA, Dallas, has been working directly with builders for more than 20 years through its Project Homes business unit in Upper Marlboro, Md. Project Homes was built on business relationships developed decades ago in the Maryland-Washington, D.C.-Virginia market area, back when the Rexel business there was owned by Branch Group, and before that Interstate Electric Supply.

According to www.projecthomes.com, products from Progress Lighting, Nutone, Sea Gull Lighting, RAB Lighting and BRK Electronics are part of the Project Homes package.

Along with providing products and service, the Project Homes staff offers product expertise. They are all certified by the American Lighting Association (ALA) so they can “sell up” and educate home owners on the benefits of quality residential lighting systems.

Rexel also has developed some customized shipping solutions to make it easier for residentially oriented electrical contractors. For Tri-City Electrical Contractors Inc., Orlando, Fla., Rexel packs all of the electrical products for each new house in housing developments in separate 4-foot by 4-foot metal cages. The cages can be shipped directly to Tri-City's job sites and are tagged with the builder's name and individual lot numbers.

In addition to working more closely with manufacturers and distributors, builders use other efficiencies of scale to operate more profitably. A Joint Center for Housing Studies of Harvard University report explored several of them.

Coordination with subcontractors

Innovative building practices include automatic notification of schedule changes and frequent updates of the job-site production schedule.

Component preassembly

Preassembling major components such as roof trusses allows greater precision in manufacturing and often provides cost savings by substituting semi-skilled off-site labor for skilled on-site labor.

Supplier installation

In many product categories, builders are purchasing installation services from manufacturers or distributors.

Supply-chain management

In addition to national contracts, big builders work with contractors and other vendors to implement electronic information and inventory management.

Land options

Builders use options, joint ventures and other approaches to keep land costs off their books until they buy entitled lots. This helps builders incur these expenses nearer to the time of construction.

Things to Come

To get a sense of how the home-building market may look one day to electrical players, it's worth a look at a few of the largest distributors that serve it: Stock Building Supply, Raleigh, N.C., a distributor of construction products; its sister company, Ferguson Enterprises, Newport News, Va., a huge plumbing distributor; and their parent, Wolseley plc, Reading, England, one of the largest distributors in the world. These distributors are of interest to electrical distributors, manufacturers and reps because of their collective clout in the home-building market, acquisitive intentions and unique operating strategies.

Size

Stock Building Supply and Ferguson Enterprises are already two of the largest distributors on the residential building scene, but they plan to combine their talents to be an even bigger force in the future. Stock Building Supply had $4.1 billion in 2005 revenue, 307 locations in 33 states, and does 87 percent of its sales with home builders. In the future, the company wants to diversify its market mix so light-commercial construction and repair and remodeling work each account for 15 percent of sales. Ferguson had $7.1 billion in 2005 revenue and 1,100 branches in North America. It does approximately 40 percent of its business with home builders and their subcontractors. Their parent, Wolseley, had $21.5 billion in 2005 sales with 70,000 people working in more than 4,200 branches in 14 countries.

Acquisition strategy

In its most recent fiscal year, Wolseley spent more than $940.5 million on more than 30 acquisitions in North America for Stock Building Supply and Ferguson Enterprises. These purchases were part of a massive global acquisition binge in which Wolseley spent more than $1.7 billion on 53 acquisitions around the globe. The Stock Building Supply acquisitions included Efficient Electric and United Electric, two Las Vegas-based electrical contractors with a taste for residential work and DSI Inc., a Las Vegas-based electrical distributor. Wolseley's name also comes up frequently as a potential acquirer for electrical distributors.

Unique operating strategy

Along with performing all of a traditional distributor's typical functions, such as stocking local inventory, providing product expertise and making deliveries, Stock Building Supply is a manufacturer and subcontractor. The company manufactures wall panels, building trusses and millwork such as molding, stairs, windows and doors in several dozen manufacturing facilities in the United States. Stock Building Supply also installs framing, siding, windows, insulation, wallboard, doors, stairs, door locks, cabinetry, countertops, decks and fences. On Stock Building Supply's Web site, a promotion aimed at builders proudly states, “You never have to deal with another subcontractor. We do it all for you.”

It's hard to imagine an electrical distributor acting as both an electrical manufacturer and an electrical contractor, but if builders already rely on a national distributor such as Stock Building Supply to provide these services in their largest product categories, perhaps the concept isn't so far-fetched.

It's not totally unheard of for an electrical supply house to employ subcontractors. O.K. Electric Supply, Perth Amboy, N.J., hires subcontractors to do lighting retrofits as part of its Energy Solutions energy-service company (ESCO). (See “Going Green,” Electrical Wholesaling, July 2006, page 18.)

Some distributors are already taking on some of the sourcing and marketing functions of electrical manufacturers through private-labeling arrangements. Distributors that source and market some electrical products under their own brands include Rexel; City Electric Supply, Orlando, Fla.; and, in the past, Graybar Electric Co., St. Louis. The line between distributor and manufacturer is also blurry with the electrical distributors that manufacture custom panelboards for industrial customers.

Manufacturers of residential building products will be faced with challenges in their relationships with builders down the road. Most large builders consider their own companies' brands to be most important, although they will promote manufacturers that have strong brand recognition with home buyers, such as Carrier or Trane air-conditioning units, Moen plumbing fixtures and some brands of cabinetry and countertops. Several electrical manufacturers, including Leviton Manufacturing Co. Inc., Little Neck, N.Y., and Lutron Electronics Co., Coopersburg, Pa., have focused on building this level of brand recognition with regular advertising in builder, home-improvement and “shelter” magazines.

But at least two large builders, Beazer Homes and Centex, are actively looking at products manufactured by contract manufacturers in China and the Far East, and have said they would use these products if the quality was acceptable and there were savings over traditional brands. Both companies mentioned lighting fixtures as one target area for offshore sourcing.

The home-building market will always be a big part of the average electrical distributor's business mix. However, electrical distributors should be aware of the changes reshaping this market and act accordingly.

The 10 Biggest Builders

Table 1. The 10 largest home builders may account for 50 percent of all new home sales by 2010, according to some analysts covering the home-building industry.

Rank

Builder

Headquarters

Gross revenue

Closings

1

D.R. Horton

Fort Worth, Texas

$14.2 billion

51,383

2

Pulte Homes

Bloomfield Hills, Mich.

$14.7 billion

45,630

3

Lennar Corp.

Miami

$13.9 billion

42,359

4

Centex Corp.

Dallas

$14.7 billion

37,022

5

KB Home

Los Angeles

$9.4 billion

31,009

6

Beazer Homes USA

Atlanta

$5.2 billion

18,401

7

Hovnanian Enterprises

Red Bank, N.J.

$5.9 billion

17,783

8

The Ryland Group

Calabasas, Ca.

$4. 8 billion

16,673

9

M.D.C. Holdings

Denver

$4.9 billion

15,307

10

NVR

Reston, Va.

$5.3 billion

13,787

Source: Builder magazine. Builders are ranked by number of home closings.

The Products that Count

Table 2. Although electrical products are a critical element in any new home, framing, cabinets, counter tops and plumbing fixtures are just a few of the products that demand more mind share with builders.

(Based on $192,846 in building materials for a 2,500-square-foot house)

Product

% of Total

Framing and trusses

21.3%

Excavation, foundation and backfill

9.9%

Cabinets and countertops

6.6%

Plumbing

5.3%

Drywall

4.9%

Tiles and carpets

4.2%

HVAC

3.7%

Painting

3.6%

Siding

3.6%

Electrical wiring

3.4%

Windows

3.2%

Landscaping and sod

2.6%

Trim

2.5%

Interior doors and hardware

2.4%

Roof shingles

2.2%

Sheathing

1.4%

Insulation

1.4%

Appliances

1.3%

Asphalt driveway

1.3%

Wood deck or patio

1.0%

Exterior doors

0.9%

Lighting fixtures

0.9%

Stairs

0.6%

Steel

0.3%

Gutters and downspouts

0.2%

Source: Big Builder magazine

Doing it Right

There is no secret sauce when it comes to the services residential electrical contractors and builders expect from electrical distributors. Here's how the best in the business succeed in this highly competitive market.

Don't just dabble. The electrical distributors that do the best job servicing the residential market often have decades of experience. Rexel USA, Dallas, enjoys tight relationships with residential electrical contractors and builders that go back decades. Its Project Home division in Upper Marlboro, Md., is staffed with highly experienced personnel who do nothing but service builders. To learn how other electrical distributors handle the residential market, check out “Home Caterers,” a feature article that appeared in EW's July 2006 issue that's now archived at www.ewweb.com.

Stage products so they hit the job site exactly when electricians need them. Shipping them a day early, or, God forbid, a day late, can create a huge snafu in the workflow on a job site.

Package and label products by individual home or housing development. According to an article in Power Outlet, Rexel USA's internal magazine, a key element of servicing builders is labeling and shipping products exactly how customers need them on the job site. For one electrical contractor, Rexel loads 4-foot by 4-foot wire cubes with products and tags each wire cube by individual home and development.

Get real about residential structured wiring. If you want to be a player and not a pretender in the residential market, you must invest big-time in residential structured wiring. It's hot, fun to sell and is top-of-mind with most builders these days because prospective home builders want high-speed Internet access, security systems, media rooms and/or home theaters and programmable dimming systems.

You can't go waist-deep in this market. Take the plunge and do it right if you really want to make a name for yourself with builders. VDV product vendors have tons of resources to help you build this business. Don't forget the archives at www.ewweb.com. It's loaded with articles the magazine has published over the past seven years. Just type “VDV,” “datacom” or “structured wiring” into the search engine.